We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect ...information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard economies without persistent informational frictions, externalities, nonconvexities, or strategic complementarities in production. The models we consider are deliberately simple, but could serve as benchmarks for more complicated equilibrium models with additional features.
This paper surveys learning-to-forecast experiments (LtFEs) with human subjects to test theories of expectations and learning. Subjects must repeatedly forecast a market price, whose realization is ...an aggregation of individual expectations. Emphasis is given to how individual forecasting rules interact at the micro-level and which structure they cocreate at the aggregate, macro-level. In particular, we focus on the question wether the evidence from laboratory experiments is consistent with heterogeneous expectations.
This paper tests the ability of New Keynesian models to match the data regarding a key channel for monetary transmission: the dynamic interactions between macroeconomic variables and their ...corresponding expectations. We exploit survey expectations data and adopt a dynamic stochastic general equilibrium (DSGE)-VAR approach to assess the extent and sources of model misspecification. The results point to serious misspecification in the expectations-formation side of the DSGE model. The rational expectations hypothesis is primarily responsible for the model's failure to capture the co-movements between observed macroeconomic expectations and realizations. Alternative models of expectations formation help partially reconcile the New Keynesian model with the data.
We estimate a “hybrid expectations” version of the Smets and Wouters (2007) model in which a subset of agents employ simple moving-average forecast rules that place a significant weight on the most ...recent data observation. We show that the overall fit is improved relative to an otherwise similar version in which all agents have fully rational expectations. In-sample and out-of-sample analyses show the superiority of the hybrid expectations model in generating an expected inflation series that more closely tracks expected inflation from the Survey of Professional Forecasters.
We use several U.S. and euro‐area surveys of professional forecasters to estimate a dynamic factor model of inflation featuring time‐varying uncertainty. We obtain survey‐consistent distributions of ...future inflation at any horizon, both in the U.S. and the euro area. Equipped with this model, we propose a novel measure of the anchoring of inflation expectations that accounts for inflation uncertainty. Our results suggest that following the Great Recession, inflation anchoring improved in the United States, while mild de‐anchoring occurred in the euro area. As of our sample end, both areas appear to be almost equally anchored.
Consumer inflation expectations are highly disperse, with some households reporting very high inflation forecasts. In recent years, disagreement in longer-run inflation expectations has fallen, ...reflecting compression in the upper part of the distribution. The 75th percentile of the distribution of longer-run inflation forecast has fallen 0.21 percentage points per year since 2012 and is at an all-time low. I show that the decline in long-run inflation expectations at the upper end of the distribution seems to reflect improvement in consumers’ general economic sentiment, rather than stronger anchoring of inflation expectations.
•The 75th percentile of long-run inflation expectations has fallen since 2012.•This reflects improved economic conditions, not necessarily better anchoring.•Declining disagreement reflects compression in upper part of the distribution.
Inflation expectations can quickly become unanchored if the central bank undermines its commitment to the inflation target. This paper exploits an abrupt change in monetary policy by the Brazilian ...Central Bank in 2011 and microdata from a daily survey of professional forecasters to establish support for this claim. Reanchoring came only years later, after a regime shift that included a change of government. A simple model with a well-defined concept of (un)anchored inflation expectations provides a coherent explanation and structural interpretation of our empirical findings.
•Expectations can quickly become unanchored if central bank undermines inflation target.•Abrupt policy change by Brazilian Central Bank and daily survey of professional forecasters support this claim.•Reanchoring took place after regime shift that included change of government.•Simple model with well-defined concept of (un)anchored inflation expectations makes sense of empirical findings.
•A cyclone is used to identify the impact of disasters on subjective expectations.•Affected Indo-Fijians anticipate larger and more frequent future disasters.•Risk perceptions of affected indigenous ...Fijians are unaltered.•These results are consistent with differing cultural and social safety nets.•Both groups over-infer risk, regardless of whether or not they suffered losses.
Natural disasters give rise to loss and damage and may affect subjective expectations about the prevalence and severity of future disasters. These expectations might then in turn shape individuals’ investment behaviors, potentially affecting their incomes in subsequent years. As part of an emerging literature on endogenous preferences, economists have begun studying the consequences that exposure to natural disasters have on risk attitudes, perceptions, and behavior. We add to this field by studying the impact of being struck by the December 2012 Cyclone Evan on Fijian households’ risk attitudes and subjective expectations about the likelihood and severity of natural disasters over the next 20 years. The randomness of the cyclone’s path allows us to estimate the causal effects of exposure on both risk attitudes and risk perceptions. Our results show that being struck by an extreme event substantially changes individuals’ risk perceptions as well as their beliefs about the frequency and magnitude of future shocks. However, we find sharply distinct results for the two ethnicities in our sample, indigenous Fijians and Indo-Fijians; the impact of the natural disaster aligns with previous results in the literature on risk attitudes and risk perceptions for Indo-Fijians, whereas they have little to no impact on those same measures for indigenous Fijians.
•Textual news data and machine learning methods are used to analyze expectations.•News media coverage predicts households’ inflation expectations.•State-dependent information rigidity among ...households is explained by the news.•Study highlights media’s important (independent) role in the expectation formation process.
Using a large news corpus and machine learning algorithms we investigate the role played by the media in the expectations formation process of households, and conclude that the news topics media report on are good predictors of both inflation and inflation expectations. In turn, in a noisy information model, augmented with a simple media channel, we document that the time series features of relevant topics help explain time-varying information rigidity among households. As such, we provide a novel estimate of state-dependent information rigidities and present new evidence highlighting the role of the media in understanding inflation expectations and information rigidities.
Psychological factors, market sentiments and less-than-fully-rational shifts in beliefs are widely believed to play a role in the economy. Yet, they are rarely considered in macroeconomic models. ...This article evaluates the empirical role of expectational shocks on business cycle fluctuations and relaxes the rational expectations assumption to exploit survey data on expectations in the estimation of a New Keynesian model, which allows for learning by economic agents. Expectation shocks affect the formation of expectations and capture waves of optimism and pessimism that lead agents to form forecasts that deviate from those implied by their learning model.
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